How US$5 billion of debt caught up with Toys ‘R’ Us
Toys ‘ R’ Us Inc has been making US$400 million in interest payments on its debt every year, largely due to itsUS $6.6 billion leveraged buyout in 2005.
This week, it succumbed to its debt burden, leading to the biggest bankruptcy of a US retailer since that of Kmart in 2004.
The largest US toy retailer’s decision to file for Chapter 11 bankruptcy protection on Monday took investors by surprise, given that the company faced no imminent debt maturities and had managed to overcome financial stress in the past by securing concessions from its creditors.
But the company’s ability to kick the can down the road had been exhausted.
The bankruptcy filing was the culmination of an unsuccessful seven-month effort by Toys ‘R’ Us to find relief from its US$5.2 billion debt pile, according to bankruptcy court filings and people familiar with the deliberations.
The advisers that Toys ‘R’ Us hired to fix its capital structure explored at least two deals with some of its creditors to raise money that would have helped the company stave off bankruptcy before the key holiday shopping season, avoiding a supply chain disruption stemming from vendor fears about repayment, a bankruptcy filing shows.
The Wayne, New Jerseybased company’s creditors’ unwillingness to show any more leniency underscores the lack of confidence by investors in the troubled brick- and- mortar retail sector, which has been pummeled by the rise of ecommerce companies such as Amazon.com Inc.
Toys ‘R’ Us was looking to raise at least US$200 million to make it to January, at which point it could work on fixing its entire capital structure, according to court filings.
Over the years, Toys ‘R’ Us had been able to win other shortterm fixes from creditors, even as its financial performance deteriorated.
Once the company realised that it could not secure financing to get through the holiday season, the objective became “let’s get it done as quick as possible so it does not interrupt the holidays,” Toys ‘R’ Us chief executive officer David Brandon told Reuters in an interview.
Filing for bankruptcy allowed the company to secure financing to continue to operate its stores.
Given that “we successfully obtained our debtor-in-possession financing today, we can assure our lenders that we are in a good position to accept shipments on a normal basis and they have great assurance they will be paid,” Brandon said. — Reuters